Activity Based Costing

The Challenge

This client understood its cost basis only at a consolidated level. It could not allocate costs to the various parts of its supply chain or channels and so could not reliably embark on process improvement programs.

The company had been under performing for two consecutive years.

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Activity Based Costing Solution

Bestrane built an Activity Based Costing (ABC) model which allocated costs and revenue at the individual sales branch, customer and product level. Direct and indirect costs were broken down and allocated to meaningful operational activities.

These activities were then in turn allocated to the products, customers and branches which consumed them. The ABC model also allocated capital expenses such as Customer Debtor costs and product holding costs to the various customers and products. Upon completion of the ABC model the business was able to understand the profitability of their customer and product portfolios.

The Activity Based Costing model highlighted a significant problem with inventory levels. A subsequent project followed where a model was built to determine the optimal level of products stocked by location.

Activity Based Costing Benefits

The results focused the client on the main issues, which were now quantified and defensible.

The client could now manage their supply chain all the way to the customer by understanding customer needs and expectations in order to avoid over-stocking.

It restructured the distribution network.

The distribution of vinyl’s and other bought-in products was centralized to one warehouse, reducing costs without compromising the customer service level.

Customer profitability results exposed “cherry-pickers which prompted management to review their customer and product pricing matrices.

Product profitability identified potential product line rationalizations.

Region profitability highlighted areas with a relatively higher cost structure, further reinforcing the benefit of redesigning the way in which the client sells to the market i.e. centralizing distribution to one location and down-sizing remaining warehouses.

If you would like more information :

For more articles go to www.activitybasedcosting.com.au 

For information on ABC software go to www.algsoftware.com.au

For information on ABC services go to www.bestrane.com.au